Rory Vaden: Eliminating debt is the first step on the road to riches

Mar. 9, 2014

Managing expenses is the key to building wealth. / Getty Images/iStockphoto

Written by

Rory Vaden

For The Tennessean

The first realization of rich people is that they understand the difference between an asset and an expense.

Two questions for you:

1. What is the greatest financial asset in your life?

2. What is the largest financial expense in your life?

What was your answer for your greatest asset? If you are like most people — and like me originally — you might’ve said “my house” or “my IRA” or “my 401(k).” Those are all wrong.

The best definition of a true “asset” related to personal finances that I’ve seen comes from Robert Kyosaki in “Rich Dad, Poor Dad,” in which he says: “An asset is anything that puts money in your pocket, and an expense is anything that takes money out of your pocket.”

Does your house put money in your pocket or take money out of your pocket? Unless you sell your house (in which case you wouldn’t have a place to live), your house takes money out of your pocket. It costs you money every month for your mortgage, property tax, interest, furnishing it, fixing it, etc. Your primary residence is not an asset then; it’s a huge expense.

Your single greatest financial asset is your ability to earn income. In other words, the money you make from your job or work is your greatest asset. You probably will never make more money from an investment than you will from your personal income when you are first starting out on your road to building wealth. Freeing up your earnings and working to build up your ordinary income, then, are the most impactful investments you can make.

The problem is that your overspending and debts may have taken control of your greatest asset. The reason getting out of debt is such a critical part of being rich is because the moment you don’t have any monthly payments (debts, bills, etc.), your greatest asset (your earnings) starts to pile up and you start to get rich.

Big return on investment

You don’t need a get-rich-quick real estate scheme, or (initially) to learn how to play the stock market. Those are things that might — if you’re lucky — make you a 10 to 15 percent return.

Once you’re out of debt, your regular income will stop accumulating only by the amount you have to pay for ongoing bills (cable, utilities, phone, etc).

Which means as an investment strategy, getting out of debt is huge because the income you get to keep as a result of being debt-free functions like the return you get on that investment. So, since you get to keep, say, 80 percent of your earnings after becoming debt-free it’s like an 80 percent return on your money!

If you make $50,000 a year (after taxes), then getting to keep $40,000 of it because you don’t have debt is much better (not to mention more secure and more guaranteed) than taking a financial risk to make $10,000 to $20,000 on some side real estate project or start-up venture.

If you want to get rich, the first and best investments you can make are learning to work your tail off to grow your ordinary income and getting out of debt. Which is why I’m such a convicted promoter of Dave Ramsey.

Oh, by the way, what is your greatest expense? You might have said “college” or “wedding” or “kids” or “retirement” or “house.” Again, you’d be like me if you did — and you’d be wrong.

The single greatest expense you will ever have in your life is taxes. Taxes (at least in the U.S.) can take as much as 40 percent of your money out of your pocket before it even reaches your pocket. Learning to manage your taxes then becomes a key part of being rich in the long term; but in the short term, getting out of debt is more powerful.

Getting rich isn’t as hard as you think when you know how to think about it the right way.

Rory Vaden is co-founder of Southwestern Consulting, a self-discipline strategist and speaker and New York Times best-selling author of “Take the Stairs.” Learn more at www.roryvadenblog.com.